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How will the Bank of England base rate increase impact house buying?

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Introduction

In August 2022, the Bank of England confirmed a base rate increase from 1.25% to 1.75% in a bid to get a grip on soaring inflation rates. The base rate increase will impact most people, including those with credit cards, mortgages and buyers searching for a new home

What does the base rate increase mean for house buyers?

There are two main points to consider when discussing the impact of the base rate increase on house buyers: the effect on mortgages and buyers, including first-time buyers. 

  • Mortgage payments

Increasing interest rates impacts the cost of a mortgage if you are on a variable rate, rather than a fixed rate. Most UK homeowners have a fixed-rate mortgage. However, figures suggest that around 21% of mortgage holders have a variable rate mortgage (source). This means that the amount they pay will rise and fall in line with the base rate. Increasing the base rate contributes to rises in monthly payments. To illustrate this, take the example of a £150,000 mortgage with 20 years left on the term. If the tracker rate is 2.5% and the base rate increases by 0.5%, the new rate will be 3%. This will add a sum of £38 per month to the household mortgage payment.

  • Buying a property

The rise in base rates makes taking out a mortgage more expensive, which has a direct impact on buyers, especially first-time buyers. It is notoriously difficult to get onto the ladder. House prices have risen dramatically since 2020. The average cost of a first home reached almost £225,000 in 2022. Saving for a deposit is more difficult, especially with the cost of living rising, and the base rate increase will make monthly payments more expensive. Rightmove suggests that the average monthly payment will rise to £1,030. This is the highest sum since 2012. For first-time buyers, mortgage payments will represent 40% of the average monthly income due to the August base rate increase. This is a rise of 2% (source). 

What are the challenges facing home buyers?

Home buyers are facing an incredibly challenging situation because house prices have risen, the Bank of England has increased the base rate and the cost of living is rising rapidly. Nationwide revealed that house prices are increasing by an average of 11% per year and the cost of taking out and paying back a mortgage has also risen. Since the start of January 2022, the average mortgage payment for a first-time buyer has leapt from £813 to over £1,000 (source). If the demand for housing continues to increase, prices will rise and competition for new homes from house builders that specialise in affordable housing will also intensify making it more difficult to buy a house. 

Summary

The Bank of England has announced a base rate increase of 0.5%. This has implications for homeowners who have a variable mortgage, as well as buyers looking for new homes. The cost of borrowing will increase at a time when house prices are high, making it more difficult for buyers to get onto or climb up the property ladder.